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Discretionary Will Trusts still useful

Before October 2007, Discretionary Trusts were commonly used in the Wills of married couples and civil partners to ensure that both the Nil Rate Inheritance Tax Bands were fully used.

Such a Trust would come into existence on the death of the first spouse. It could then be used to benefit the surviving spouse and/or children without the Trust assets being added to the surviving spouse’s estate and therefore being liable to Inheritance Tax.

In October 2007, the Chancellor brought in changes that allowed married couples and civil partners to leave their unused Nil Rate Band to the surviving spouse. This effectively means that couples can fully use both Nil Rate Bands available to them and would only need simple Wills, leaving everything to each other. Since 2007, many are under the impression that the Nil Rate Band Discretionary Will is no longer of use. This is not the case.

Let us consider an example where you are married to a UK-domiciled spouse and have an interest in a business. The interest in the business may well qualify for business property relief. Because of the relief, the value of the business is effectively reduced to zero when calculating the inheritance tax liability on your death.

However, this would not be an issue if you were leaving your estate to your spouse. The only problem is that when your spouse dies, will they meet the qualifying conditions to obtain business property relief on the business interest that you left them. Will the relief even be available by then? We may not know whether they will or will not be entitled to the relief until they pass away, and by then it is too late to do anything about it.

A Nil Rate Band Discretionary Trust Will can provide a solution; to be precise, two Trusts. Within the Will you include two Discretionary Trusts. Into the first Discretionary Trust you leave the value of your estate up to the unused Nil Rate Band (currently £325,000), excluding your interest in the business. Into the second Discretionary Trust you leave your business interest.

This ensures that we get HM Revenue and Customs’ agreement that Business Property Relief is available to reduce the value of the business interest to nil. If it is not, then we may have time to amend. On the assumption that the relief is available, we have then secured the relief on first death. We then have the option to receive the relief twice by selling the business interest from the Trust to the surviving spouse. There are other issues to consider, including Stamp Duty and Capital Gains Tax. However, with careful planning and attention, significant tax savings can still be made with Discretionary Trusts in Wills.

Tip: Our ‘Inheritance Tax Health check’ could be just the starting point that you need. It will tell you whether you have a potential Inheritance Tax liability and, if so, provide recommendations to address it. If you are interested, please do not hesitate to contact me.

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